Exploring the risk environment: regulatory, macroeconomic and other top risks

July 2013

On May 16-17, 2013, Tapestry Networks and EY welcomed 19 non-executive directors, chief risk officers, and distinguished guests to the first annual Insurance Directors’ Summit in London. This was the seventh meeting of the Insurance Governance Leadership Network (IGLN).

The summit convened as the industry faces its most challenging time in recent memory. Several directors argue that the majority of insurers weathered the financial crisis reasonably well, but it remains to be seen how large insurers will navigate the multitude of economic, legal and regulatory, and strategic challenges buffeting the industry since that time.

Summit participants note that the complexity and volume of risks facing the sector is greater than ever before. New regulations and the macroeconomic climate rise to the top of the list of concerns for many directors, who engaged in a wide-ranging series of conversations related to the systemic importance of insurers, the need for supervisory coordination and the impact of persistent low interest rates over the course of the Summit. While these risks may dominate board-level discussions, insurers also stressed the need to maintain a laser focus on accurately assessing emerging risks as well.

At the summit, we were joined by key industry participants from the public and private sectors, including Yoshihiro Kawai, Secretary General, International Association of Insurance Supervisors, Patrick Montagner, Director, Insurance Supervisory Department, Autorité de Contrôle Prudential, Banque de France, Carlos Montalvo, Executive Director, European Insurance and Occupational Pensions Authority, Hugh Savill, Director of Prudential Regulation, Association of British Insurers, Paul Sharma, Deputy Head and Executive Director of Policy, Prudential Regulation Authority and Kurt Karl, Chief Economist, Swiss Re.

We are pleased to share five ViewPoints that capture the spirit of summit conversations, as well as insights from prior meetings and ongoing dialogues with IGLN participants.

  • Implications of ‘systemically important’ designation. Since the IGLN’s inception just over a year ago, the challenges presented by new modes of regulation and supervision have been a principal topic of discussion. In particular, the topic of systemic importance of insurers has come to the fore. In June two large insurers were named as domestic systemically important financial institutions (SIFIs) in the United States. By all accounts, the list of insurers considered to be global SIFIs will be made public shortly. In relatively short order, supervisors will need to clarify how new supervision, resolution and loss absorbency requirements will work.

  • Cross-border supervision: the next big challenge. During the summit, several directors and supervisors recognized effective cross-border supervision as a principal challenge facing the industry. Whether or not IGLN participants are designated as systemically important, all large and internationally active groups will face more intensive supervision in the coming years. Summit dialogue focused on the challenges to implementing a new model for cross-border supervision, which range from the need for new skills and frameworks within supervisory bodies, to the difficult work of setting supervisor and industry expectations.

  • Improving risk identification processes. Over the last six months, IGLN conversations have explored the ways insurers are improving risk governance. What began with discussions about the structural components of risk governance at the board and executive management levels has evolved to include a discussion of process and practice. In this meeting, participants focused on improving risk identification practices. In an environment of complex and ever-changing risks, directors hope to understand better how their companies might improve the processes for identifying emerging risks and evaluate these potential risks from new perspectives.

  • Top and emerging risks for global insurance. This conversation grew from the discussion of risk identification, and focused on specific risks confronting insurers. In addition to regulatory and macroeconomic concerns, participants identified and evaluated crucial and evolving risks related to: operations, information technology and outsourcing, consumer protection and company conduct, use of internal models, changes in business models, and competitive threats.

  • The extended low-rate environment: challenges for the insurance industry. Over the past five years, rates of return have fallen to historic lows. The effects of low rates on the insurance industry are slow to develop, which may both allow insurers more time to react and tempt them to postpone necessary actions. At the summit, participants discussed why low rates of return are a concern, how insurance boards should respond, risks of a rapid rise in rates and why the industry should reach out to policymakers.